CFTC’s Chilton Seeking Review of CME Wash-Trade Restrictions

By Silla Brush -
Jun 24, 2013

U.S. regulators should review CME Group Inc. (CME)’s plan for blocking wash trades to ensure that it sufficiently restricts the illegal transactions, said Bart Chilton, a member of the Commodity Futures Trading Commission.

CME’s plan for preventing the trades, in which a party buys a contract from itself, should be put on hold and not automatically take effect July 1, Chilton said in remarks prepared for a speech today at the Trading Show Chicago 2013 conference. Chilton, one of three Democrats among the CFTC’s five commissioners, said the agency should take additional steps to vet the CME guidance and determine if other exchanges will have similar or better policies.

“Right now there are simply too many unanswered questions that need to be addressed from an oversight and surveillance perspective, and potentially from an enforcement perspective,” Chilton said. “We need to take a deep breath and ensure that we know, to the best of our ability, what might occur.”

High-frequency trading firms sometimes conduct trades with themselves in ways that distort liquidity and transparency in derivatives markets and warrant more regulatory oversight, Chilton has said. He wants the agency to review whether high-frequency firms are engaging in the trades to create “fantasy liquidity” and entice other traders into the market.

“There are a massive number of trades out there that could be construed of as wash trades,” Chilton said in an interview in Chicago.

Increased Focus

The CFTC and Securities and Exchange Commission have increased their focus on high-frequency and algorithmic trading since May 6, 2010, when about $862 billion was erased from stock values in 20 minutes before share prices recovered. Regulators have expressed concern that some firms and electronic exchanges don’t have enough control over trades or technology glitches that could roil markets.

CME’s guidance is intended to provide information about the exchange’s ability to allow traders to automatically block the matching of orders that would potentially violate wash trade prohibitions, Anita Liskey, spokeswoman for the world’s largest futures exchange, said in an e-mail.

“We believe our advisory is consistent with longstanding rule interpretations” as well as commodity laws, Liskey said. The CME’s wash-blocking program, called Self-Match Prevention, is optional for traders.

The CFTC is improving its capability to oversee high-frequency traders and can analyze trades occurring in milliseconds, Chilton said. The agency’s staff have focused on trading activity primarily when markets were opening and closing, analyzing millions of trades. During those periods, high-frequency traders engaged in 100 to 500 trades per second in commodity markets.

“We are going to come into your dens and look and analyze with experts your algo programs to see if you are violating the law,” Chilton said. “We won’t stop at getting your instant messages, your e-mails or your texts messages.”